and includes the staggering failure to adequately account for revenues and expenditures

which points to serious structural problems the current governor, Alejandro García Padilla, is not addressing, asking instead bondholders to “share the sacrifices.”

Here’s the situation as I see it:

It is not in García Padilla’s interest to improve the economy

García Padilla’s administration relies heavily on a large bureaucracy, and he knows his predecessor was voted out of office for trying to reduce it. Estimates show that the government of Puerto Rico has 160,000 employees too many. That’s enough of a voter base to keep him in office.

If the U.S. refills the ATM, García Padilla will claim credit for it; if the U.S. doesn’t, he has someone to blame.

And don’t forget that García Padilla and other commonwealth supporters lost miserably during the last plebiscite, when statehood won by approx. 60%. For as long as Puerto Rico remains in a financial swamp, García Padilla knows the question of statehood will be dismissed with “And They Want to Be a State?”
(Or as Ed Koch put it, “The People have spoken … and they must be punished.”)

A group of institutional bondholders—including Franklin Advisors and Oppenheimer Funds—representing 40% of the outstanding bonds and more than 500,000 individual bondholders have offered the company a restructuring plan to avoid receivership. It includes a new, $2 billion capital commitment to modernize power-generation equipment and cut costs. If Prepa [Puerto Rico Electric Power Authority (Prepa)] can improve its operational efficiency, the group believes that its proposal can lower the electricity rate to the range of 22 cents per kilowatt-hour from the 28-cent range of recent years.

This intervention is unlikely to appeal to Puerto Rico’s political class, which uses Prepa as a populist honey pot. The company has a dismal collection record and one of the most notorious deadbeats is the government. A Nov. 15, 2014, report by FTI Capital Advisors found that the company had “over $200 million in accounts receivable from public corporations, of which approximately 70% is over 120 days old.”

Making them pay is the right thing to do; it’s just not the Puerto Rican thing to do.

A Puerto Rican default should not surprise anyone. According to Carlos Colón de Armas, acting dean of the School of Business Administration at the University of Puerto Rico, for eight years from 2005 through 2012, government expenses exceeded revenues on average by approximately $1 billion annually. The dean told me by telephone that total commonwealth debt is now around $73 billion and in 2013 it was 101% of the island’s gross national product (GNP) up from 57% in June 2001. (Although gross domestic product is the most widely accepted measure of an economy’s size, it reflects the profits of large multinational corporations booked for tax purposes in Puerto Rico but not retained in the local economy. Therefore, GNP, a measure of what is produced by locals, is a more accurate tool to assess the economy.)

increased expenses by almost $600 million in his first budget. While he is now cutting spending, the cuts are mostly from that increase, according to Mr. Colón de Armas. Some $500 million-$800 million in fat—from subsidies to special interests to funding for political parties—remains untouched in the $9.6 billion budget.

Fortuño lost by 12,000 votes since García Padilla (known as Agapito) promised the moon and the stars.

Too much bureaucracy, much of it for welfare, and too much rewarding failure over success drive up costs and drive out the productive. Puerto Rico’s most talented citizens are voting with their feet. The island loses about 1% of its population a year, a deadly loss compounded over the years for any economy.
To bring these people back, the governor has to fight to cut taxes and really go after the country’s entrenched special interests with a baseball bat.

The 39% corporate tax has to go.

He [governor Alejandro García Padilla] also must fight in the U.S. Congress to reinstate Puerto Rico’s special tax break that ended in 2006 so that investment will once again return.

Finally, he must also take on Big Labor’s favorite, the Jones Act, which artificially drives up shipping costs, putting local manufacturers at a disadvantage, demanding Congress at least give Puerto Rico an exception.

S&P on Tuesday lowered Puerto Rico’s general obligation bond rating to double-B-plus from triple-B-minus, stripping the island of its investment grade rating. The rating firm said it cut the rating because of Puerto Rico’s “reduced capacity” to borrow and the contraction in its economy in all but one year since 2006. It kept the island’s ratings on watch and warned of further cuts if the island is unable to raise money.

Puerto Rico has also been weighed down by large pension obligations, a 15% unemployment rate and big losses in the value of some of its debt. But the Puerto Rico government has been taking steps to bolster the economy and improve its fiscal outlook by overhauling pensions and raising taxes.

Despite the benign response to the downgrade, the cut adds pressure on Puerto Rico to shore up its finances with a near-term borrowing, analysts said. Puerto Rico, which has $70 billion of debt, has been able to put off borrowing in recent months, but its flexibility is fading, said Daniel Hanson, a credit analyst at Height Securities LLC.

Island officials have been planning a bond offering of some $2 billion in coming weeks, according to people familiar with the matter. The officials have been weighing how to raise money with offerings backed by sales taxes or the island’s general fund, or a deal structured by hedge funds and other distressed investors who may demand yields near 10%.

Gov. Alejandro García Padilla is finally trying to cut the budget and reduce the deficit to $75 million, something he’s been avoiding, considering how his predecessor, Luis Fortuño, was not re-elected for doing just that.